Prompted by a decent set of results this week, I thought I’d take a look at JPMorgan European Discovery Trust (JEDT). This fund, which used to be known as JPMorgan European Smaller Companies, was beset by poor performance for a number of years. Investors shied away from it as a result, and it tended to trade at mid-to-high-teens discounts, despite being quite active in buying back its own shares.
It was clear that something needed to be done as JEDT’s proposition was not enticing when compared to the other funds on offer, but the trust is a decent size (a market cap of £656m at the time of writing) and so was worth saving. To its credit, the board grabbed the bull by the horns and has shaken things up over the last three years and the pace of that has picked up recently.
The name change came in June 2021. The board had come to the conclusion that the previous name did not really reflect what was going on in the portfolio or the opportunities that were available to the manager. At the time, it noted that, in searching for the most exciting opportunities, JEDT is primarily focused on providing capital growth, and the trust was investing in some firms with market caps over €8bn, which is beyond what many people might think of as being purely small cap. That said, JEDT still has a small-mid-cap bias. As at 31 May 2024, 9.8% of its portfolio was in stocks that are sub £1bn, with the balance in stocks sub £10bn, and there’s nothing in the large or mega caps.
Although JEDT’s name might suggest to some a focus on emerging Europe, this is not the case. The fund invests in developed European countries and is well diversified geographically. Its allocation is also significantly different to the benchmark, with notable overweights to core European countries such as France, Germany, Italy, and the Netherlands, while it is underweight Iberia and the Nordics. It’s a similar story with its industry asset allocation although the differences are less stark, with overweights to commercial and professional services as well as consumer durables standing out.
Fast forward to last year and a more important change came in the form of tweaks to the investment process. The managers had noticed that their approach struggled during periods of high volatility in the market. In response, the managers put in place some enhancements to the investment and risk management processes. These are designed to minimise downside risk in periods where market volatility is heightened and capture upside when volatility is lower. The improvement in performance seen during the second half of the last financial year is largely attributed to these changes.
Despite the noticeable improvement in performance, the board did not rest on its laurels and – still concerned with JEDT’s medium-term performance – continued to look for further improvements. This took the form of an internal review, conducted alongside JP Morgan Asset Management (JPMAM), of the portfolio management team and its investment process.
The review ultimately led to Jon Ingram, Jack Featherby, and Jules Bloch being appointed as JEDT’s named investment managers from 1 March this year, replacing Francesco Conte who had been at the helm of the trust for the last 25 years and Edward Greaves, who had been with the trust since 2016. The new investment team, which collectively has over 40 years of experience of investing in European smaller companies, has continued to refine the investment process (this is evolution rather than revolution) and so the hope is that there could be more outperformance to come.
Looking at JEDT’s discount, this has narrowed from around the 17-18% level a year ago to around the 10-11% level today. In part, this will be a response to lower inflation expectations and the benefits that this brings to the growth stocks that JEDT allocates to. However, this movement is greater than that enjoyed by comparable peers and so it seems fair to suggest that this is at least in part a function of improved performance as well. We think that if the outlook continues to improve and if the process improvements continue to bear fruit, JEDT’s discount should narrow further from here. However, once again to its credit, JEDT’s board is not sitting back and waiting for that to happen. Instead, it is proposing to offer shareholders two tender offers.
The first tender offer, which is subject to shareholder approval at the forthcoming AGM, will be for up to 15% of the fund at a 2% discount to NAV less the costs of implementing the offer. The trigger for the second tender offer, which is also for 15% of the fund at a 2% discount to NAV less costs, is performance related and will take place if JEDT’s NAV total return does not exceed that of the MSCI Europe ex UK Small Cap Index (net) over the five-year period beginning 1st April 2024 and ending on 31st March 2029. If JEDT’s performance does not clear this hurdle, the intention is that the 2029 tender will be conducted as soon as is practical after the 2029 AGM.
In conclusion, we think that the board and manager are doing the right things and there are a number of reasons why there could be good upside from the portfolio and discount narrowing from here. Although the signs are all pointing in the right direction, it’s a bit too early to say whether the process improvements will leave a lasting impression. However, this year’s tender should help clean up the register and if the process improvements don’t deliver entirely as hoped, there will be another opportunity to cash in some more chips in five years. Against this, the current 10-11% discount looks to be pretty good value.